Bleak Economy And Way Out

Nandalal Tiwari


A person who spends more than she/he earns is bound to fall on the vicious cycle of poverty. It is a common sense. The person should either increase his/her income or reduce expenditure to avoid poverty trap. If the person maintains a balance in expenditure and income, it is good that there is no debt, but there is no progress. Stagnation is certain. If the given person is already far behind in having things considered essentials for that time than the others, the person must work hard to catch up with the others for personal image and satisfaction. Nepal, if we supposed to be a person, has started to spend more than she earns, and she is already lagging far behind many other countries in the world. She has to work harder to cover the distance between her and the other.
Finance Minister Dr. Yubaraj Khatiwada unveiled on March 30 the economic status of the country- the White Paper. One of the most striking things in the Paper is that Nepal’s recurrent expenditure is more than its expected total revenue for this fiscal year. In very normal terms, if the expected revenue is Rs. 100, expenditure is Rs. 110. Moreover, the expenditure is certain while the revenue is expected one. Revenue may be collected less than the target.
Economic picture
The White Paper presents the findings of the economic diagnosis of the country. The economic facts and figures, and the overall analysis make it clear that Nepal’s economic status is at a critical stage. On the surface, the Paper reads like a note of problems and challenges as over 95 per cent the content is related to problems. But the problems have been identified in such a way that they entail the solutions within. For instance, Nepal is an agricultural country. But we import food grains worth over Rs. 100 billion a year now. Only 25 per cent of our arable land has irrigation services. While the contribution of agriculture to GDP is one third, two-thirds of the total population is still engaged in the same sector. The question is why the two-thirds of population is making only a third of the GDP. The answer is in the figure that we have irrigation facilities to only 25 per cent of arable land. Then, we need to ensure irrigation facilities to all arable land which will result in increased production, if not productivity, and decrease in trade deficit at by 12 per cent. Then, the question is, will Minister Khatiwada pay due attention to it and ensure government investment on irrigation facilities?
The other significant point the White Paper makes clear is that banking sector has not been oriented to production sector and the banks and financial institutions (BFIs) have been engaged in unfair competition for interest rates. It is not hopeless to see that of the total loan, the BFIs have invested only 16.3 per cent in the production sector. This must have affected job creation as well. Investment in production sector has doubly beneficial: it creates jobs and it reduces imports. What about making such a policy that the BFIs have to make a certain percentage, let’s say 40 per cent, of loan investment in production sector. If the central bank, Nepal Rastra Bank (NRB), can limit the loan investment in real estate and automobiles sector, why can’t it fix the minimum loan investment in production sector? But, it is also surprising to see that only 40 per cent of people have access to banking services in the country.
It is noteworthy that trade deficit has increased by 42 folds in 25 years. And in the past, the deficit was covered because of remittance. But now, remittance has started to diminish and it is unlikely that it will increase anytime soon as the number of outbound migrant workers has started to decrease. For sure, once remittance inflow goes down, import will also decrease. This will lead to decrease in government income, that is, import revenue. If contribution of import related tax to the total revenue of the country at present is 47 per cent, it will be less than that when import goes down. The interesting point is that the White Paper says over 30 per cent businesses registered in VAT do not submit details. If so, what actions have the concerned authorities taken against them?
The Finance Minister has rightly pointed out that capital formation activities are sluggish both on the public and private sectors. Execution of development projects is not satisfactory. Informal economy is flourishing. Economic activities have shrunk in the absence of favourable investment climate. Public finance management is challenging due to non-budgetary expenditure. Financial discipline was violated by past governments. Tax waiver has been provided against established system and norms. Only 51 per cent of the pledged foreign assistance was received in last five years. Last year, only 32 per cent of the grant was used. Over 70 per cent capital expenditure is made in the last quarter of the fiscal year. Manufacturing sector is dwindling, its contribution to GDP was 14 per cent a decade-and-half-ago and now it is only 5 per cent. Contribution of industrial sector was 10 per cent some two decades ago and it is only 6 per cent now.

Way out
The White Paper has things to make people optimistic because it has correctly identified the problems. It is expected that the government will take steps forward making this the basis. If this is so, as said by the Finance Minister, what is needed is a favourable condition for investment. This needs policy reforms. In addition to making policies to attract foreign investment, Nepal needs to make policy to orient internal resources, capital in the BFIs to production sector. It is surprising to see the BFIs making profit of billions of rupees annually while the state coffer is empty and the economy of the country is on a risky path. The BFIs should also understand the situation and take measures before it is too late.

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